TPLF Transparency: A Proposed Amendment to the Federal Rules of Civil Procedure

TPLF Transparency: A Proposed Amendment to the Federal Rules of Civil Procedure

July 06, 2014

by Lisa A. RickardPresident, U.S. Chamber Institute for Legal Reform

If Third Party Litigation Financing (TPLF) is to be part of our legal system, “its use should be transparent.”

That was the theme of a letter submitted by ILR, along with leaders of several other business and legal groups, to Jonathan Rose, Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts.

ILR and the other organizations are urging the Advisory Committee on Civil Rules to adopt an amendment to Rule 26(a)(1)(A) of the Federal Rules of Civil Procedure that would require disclosure of third-party investments in litigation at the outset of a lawsuit.

“At the very least,” according to the letter, “Whenever a third party invests in a lawsuit, the court and the parties involved in the matter should be so advised.”

TPLF is a rapidly growing practice that threatens to undermine the administration of justice – both here in the United States and abroad. In essence, TPLF is the practice of hedge funds and other investment firms providing funds to plaintiffs and their lawyers in order to conduct litigation. If the plaintiff wins a monetary award, the investor is repaid out of the proceeds of the lawsuit, usually with an extremely high rate of return.

The amendment proposes adding TPLF to the list of “initial disclosures” required at the onset of any case. The language reads as follows (underlined):

“a party must, without awaiting a discovery request, provide to the other parties . . . for inspection and copying as under Rule 34, any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”

Such a disclosure amendment would be important for four key reasons:

By identifying persons/entities with a stake in the outcome of the litigation, the contemplated disclosures would allow courts and counsel to ensure compliance with ethical obligations;

The proposed amendment would satisfy defendants’ entitlement to know who is really on the other side of an action;

A litigation-funding disclosure provision would facilitate a fuller, fairer discussion of motions for cost-shifting in cases involving onerous e-discovery;

The disclosure of TPLF arrangements would be important information to have on the record in the event that a court determines it should impose sanctions or other costs.

For these reasons, ILR is hopeful the Committee will consider adoption of this proposed amendment to Fed. R. Civ. P. 26(a)(1)(A).

"Investors in the growing field of funder-backed litigation, which finances business disputes in exchange for a cut of the proceeds, are eyeing bankruptcy court as a potentially lucrative new venue," reports the Wall Street Journal's Tom Corrigan. Read More »